October ’19 & economy of Pakistan

Financial system of Pakistan is exposed to international financial watchdogs namely Financial Action Task Force (FATF) and International Monetary Fund (IMF). One is looking after Pakistan’s commitment towards Anti Money Laundering (AML) and to check Terrorism Financing. On the other hand, IMF instructed structural reforms in Economic System of Pakistan which is not limited to only tightening of monetary policy but strict fiscal measurements are proposed as well. In this regard, the month of October 2019 is very important when on 13th October fate of Pakistan will be decided, if the country’s name is included in Black List or its status has been improved enough to get away with being Grey Listed. IMF mission have recently visited Pakistan to get first hand information about implementation of its conditions against first installment out of $6.0 Billion total Loan issued for 39 months. So far the IMF team neither seems negative nor vocally positive about the targets assigned and achieved as a matter of fact. However, the team stated that the performance check will be based on results of first quarter of fiscal year therefore, in last week of October a thorough report will be published. October is also very important for expected disruption in economic activities where Molana Fazul Ur Rehman has decided to lockdown capital city of Pakistan. On diplomatic front, Pakistan will be witnessing direct results of Prime Minister Imran Khan speech against Indian lockdown of Kashmir, on economic and International activities of the country.

In October, FATF court in Paris will meet to decide if Pakistan has done enough on AML and CFT measures so that it may be taken off from Grey List or to be downgraded to black list. FATF will start its proceedings by 13th October and will last till 18th of the same month. The issue of FATF started in February 2018 when Pakistan was asked to do more on security of financial transaction and eventually downgraded in Grey list. Since then the financial watchdog is monitoring the financial affairs of the country. Indian dominated FATF has given a very short timeframe to implement FATF 27 point agenda which is not possible for a country to execute without a magic stick. However, agenda of Pakistan Tehreek Insaf (PTI) is also to curb Money laundering and to monitor corruption at levels including terrorist financing. Prime Minister Imran Khan is very clear about his view on the same and very vocal on national and international front even applauded by United States of America (USA), one of the major players of FATF. Pakistan, in one year of PTI, has worked very hard to control financial corruption and unprecedented actions has been taken against banned outfits, something even acknowledged by India, a key player of FATF. On diplomatic front PM Imran Khan has successfully raised red flag against Indian lobby working to downgrade Pakistan into black list. Kashmir issue also highlighted Pakistan’s willingness towards peace and its agenda to abide by laws of international institution so that Pakistan may come out of economic emergency. US President Donald Trump also commended the efforts of PM Khan for peace in the region. It is a notable fact that Imran Khan has ranked 17th in the list of most influential personalities around the globe where Donald Trump is at 14th.It means that the world is listening to Pakistan’s stance and these diplomatic efforts together with strengthening of internal controls will save us from being black listed however it seems difficult to get rid of grey list due to short time frame and a long to do list.

Whatever happened in last government with CPEC and its outcome on economic conditions of Pakistan but it is an established fact that China is all weather friend of Pakistan unlike USA which is tilted towards India. Therefore Pakistan need to establish win-win business solutions with China and this second stage of special economic zones is very crucial

On recent visit of IMF, State Bank of Pakistan (SBP) has reported the mission that initial results after program implementation is encouraging as volatility in exchange market due to free float and pressure on discount rate to curb inflation have been corrected by the economy itself on a very early stage. Exchange rate against Dollar is now around Rs. 156 per Dollar without SBP intervention and after continuous increase in interest rates, just before the mission arrival, a monetary policy has announced with status quo which is encouraging for ease of doing business. Dr. Reza Baqir, Governor SBP has explained the scenario to IMF delegation led by Director Middle East and Central Asia Department Mr. jihad Azour. IMF team is here to monitor start of the program and how market is reacting down the line. The information gathered by the team will be submitted to technical advisors of IMF which will assess the situation by end of October this year. Dr. Reza further explained the mission about inflation and said that the same has risen due to the economic imbalances accumulated from previous years however he hoped that the inflationary pressure will be eased in the second half of the fiscal year. Current Account Deficit (CAD) is going down together with Trade Deficit where CAD shrunk to 2.8% of GDP i.e. $500M per month where import receded by 23% year on year (YoY). Please note that the CAD was $22 Billion in previous regime, almost $2Billion approx per month. IMF mission further unleashed its aspiration from Pakistan to do structural reforms in financial and non financial sector but it requires political certainty and non confrontational behavior of the government which seems difficult. IMF wished further autonomy to central bank and to increase tenor of SBP governor from 3 years to 5 years for long term policy implementation however it is a also a fact that last 5 governors even could not survived 3 years in the office. IMF strongly believe that a single treasury account and improvement in debt management can bring down budget deficit as well however private banks can feel the heat on deposit side where presently the government use to place its deposit with the banks and banks then lend it to businesses and earn profits. One of the major structural reform and sensitive target assigned through the $6Billion Dollar package is to give authority to NEPRA to decide power tariffs itself without any governmental intervention. Though Pakistan is doing what it can to satisfy IMF with the target assigned but it is also a fact that free float exchange rate, NEPRA to adjust power tariff according to input cost, controlling inflation through discount rate are some of the conditions which are making businesses costly even for those whose inputs are not imported. In this scenario when IMF wishes to see employment opportunities in economy and social protection to the people of Pakistan, it seems a wish without substance.

While Pakistan is being recognized internationally and efforts are being made to make country out of economic emergency it is observed that the pace of China Pakistan Economic Corridor (CPEC) is getting slow. First stage related to infrastructure has been completed now whereas the second stage to establish Economic Zones is started. Whatever happened in last government with CPEC and its outcome on economic conditions of Pakistan but it is an established fact that China is all weather friend of Pakistan unlike USA which is tilted towards India. Therefore Pakistan need to establish win-win business solutions with China and this second stage of special economic zones is very crucial. Bloomberg recently reported that Chinese manufacturers are looking to Thailand as production base to avoid US tariffs. The report also included Vietnam but not mentioning Pakistan at all which is a point of concern. China is embarking its 70th anniversary of founding of People’s Republic of China, Pakistan should make maximum out of it by participating in it at national level which will be a real show of our brotherly relations with the country.

The writer is Corporate Finance Specialist and a Chartered Banker (UK)